Current Market Conditions Update

By John McCord Cardinal Point Wealth Management

The S&P 500 is down approximately
13% during the past three weeks and we have experienced 4%-7% daily market
swings the past four days. European and Asian markets have not fared any better
as most have experienced even steeper losses. Clearly, periodic retrenchments do
not bode well for investor confidence. Is the glass half-full or half-empty? As
usual, investors are asking themselves this question. It only takes one minute
of scanning the news to realize that the same information can be interpreted
quite differently. Market conditions can move swiftly in any direction and
short-term shifts are impossible to predict with certainty. With this in mind,
what is an investor to do?

The unthinkable happened on August 5th,
2011. U.S. debt obligations were downgraded by Standard & Poors (S & P),
which is a respected corporate and government research and rating agency. In
general, equity markets are clearly affected by a multitude of factors. However,
the 6.7% retracement following the downgrade was largely attributable to their
unconventional decision. This was enhanced by the inability and unwillingness of
U.S. officials to find compromise on the debt challenges. Interestingly, S &
P cited their lack of confidence in the U.S. government as the primary driver
for the downgrade. Fitch and Moody's, which are two other research and ratings
agencies, maintained their AAA ratings on U.S. debt. Their action offered the
markets a bit of support. However, S & P's choice clearly proved to be a
negative catalyst for the global markets and the appropriateness of their
downgrade is being widely questioned. A positive byproduct of the downgrade is
that the U.S. populace and their officials are keenly aware of the pressing
fiscal challenges.

The Fixed Income and Credit
Markets

Fixed income instruments or bonds
have fared much better than equities during the same period. In fact, the
ten-year Treasury bond yield was 2.14% as of August 10th, 2011, which is the
lowest yield on record. Importantly, the current yield is still paltry when
compared to historical standards and current dividend yields on many equities.
Further, the "flight to quality" towards Treasury bonds appears counterintuitive
considering the recent downgrade by S & P. Typically, bonds will sell off
and their corresponding yields will increase following a downgrade. This speaks
loudly to the fact that investors remain confident in U.S. debt
instruments.

Interestingly, credit products, which include home
mortgage loans, are tied to the ten-year Treasury bond. Consequently, mortgage
rates have become very attractive but underwriting standards remain rigorous due
to the continued strain on the financial system. Throughout the U.S., the
residential and commercial real estate market has sustained a significant
downward price adjustment. Although select areas are starting to recover, much
of the U.S. residential real estate market remains distressed. According to
Fiserv Case-Shiller, the U.S. will realize a year over year a decline of 3%
during 2011.

Ben Bernanke, The Federal Reserve
Chairman, has signaled that the Federal Reserve intends to keep interest rates
at historic lows all the way to mid 2013. This is in an effort to stabilize the
housing market and stimulate consumer spending. The threat of a global recession
has caused oil prices to decline over the past few weeks. We view this as a near
term positive for the stretched consumer. The long-term trend of U.S. dollar
depreciation in relation to other currencies will likely be the path of least
resistance. This could prove beneficial to U.S. exports. Of course, gold
continues to hit new highs in light of its perceived safety and non-correlation
to other investment alternatives. The "New Deal" and "Great Society" programs
will likely be scaled back due to budget constraints. Likewise, we believe that
tax increases and or tax reform will result from a new political reality.
Corporate earnings have largely been favorable over the past couple of quarters
but the employment situation continues be a concern. Despite historic government
actions, the unemployment rate is 9.1% as reported by the Bureau of Labor
Statistics.

European Debt
Challenges

The credit-induced recession that
began in the U.S. during 2008 has had reverberating effects in the Eurozone.
Specifically, Greece, Ireland, Portugal, Spain and Italy's financial challenges
are well documented. The European Central Bank (ECB) has provided assistance but
uncertainties remain. We are encouraged by austerity measures taken by troubled
governments and from the liquidity enhancement initiated through countries such
as Germany and France. According to Eurostat, the unemployment rate in the
European Union currently stands at 9.4%. Like the U.S., unemployment trends,
access to capital and government budget deficits are problematic.

In conclusion, a handful of
difficult issues have been amplified over the past few weeks. As noted, the
European debt crisis and the U.S. downgrade have been the primary drivers of
world equity market declines. If history is a guide, these issues will create
long-term investment opportunities for patient investors who are well
positioned.

The Cardinal Point
Advantage

Our planning and investment process
makes every effort to protect and grow principal during markets such as these.
With this in mind, Cardinal Point has positioned our clients in the following
manner:

1. We are not making dramatic
portfolio adjustments. The S & P declined 6.7% on August 8th, 2011 while
increasing 4.74% on August, 9th, 2011. Clearly, it is difficult to time the
market during volatile periods. All client portfolios have been designed
for the long-term and are constructed to protect "downturn risk".

2. Short to intermediate fixed income maturity schedules are typically
appropriate across risk profiles. We are advocating higher credit quality
holdings in light of potential headwinds from the negative credit environment.
We will seek to add credit and maturity risk when select opportunities present
themselves.

3. Our investment philosophy
dictates that clients invest in non-correlated asset classes. Portfolios are
less subject to dramatic movements when assets are non-correlated. Some examples
are gold and other commodities, REITs and foreign fixed income.

4. Clients have increased
international diversification with regard to all asset classes to minimize
portfolio exposure to the countries battling credit issues.

5. Clients have maximized their
after-tax income streams in conjunction with their unique cash flow
requirements. As noted, bond interest rates are low which is why we advocate the
inclusion of dividend-paying equities.